Is It Time To Buy Titon Holdings Plc (LON:TON) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Titon Holdings Plc (LON:TON).
Titon Holdings Plc (LON:TON) trades with a trailing P/E of 10.5x, which is lower than the industry average of 13.3x. While TON might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Titon Holdings
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for TON
Price-Earnings Ratio = Price per share ÷ Earnings per share
TON Price-Earnings Ratio = £2.01 ÷ £0.191 = 10.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TON, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. TON’s P/E of 10.5x is lower than its industry peers (13.3x), which implies that each dollar of TON’s earnings is being undervalued by investors. Therefore, according to this analysis, TON is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that TON is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to TON. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with TON, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TON to are fairly valued by the market. If this is violated, TON’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on TON, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for TON’s future growth? Take a look at our free research report of analyst consensus for TON’s outlook.
Past Track Record: Has TON been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TON’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
